Docket: A-118-16
Citation:
2017 FCA 187
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CORAM:
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WEBB J.A.
NEAR J.A.
WOODS J.A.
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BETWEEN:
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DELIZIA LIMITED
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Appellant/Garnishor
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and
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NEVSUN RESOURCES LTD.
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Respondent/Garnishee
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and
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STATE OF ERITREA
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Judgment debtor
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REASONS
FOR JUDGMENT
WEBB J.A.
[1]
Delizia Limited (Delizia) has appealed from the
Judgment of Justice Brown dated April 8, 2016 (2016 FC 393) and also from the
Judgment rendered the same day in a case involving Sunridge Gold Corp.
(Sunridge) (2016 FC 392). Although the appeals (A-118-16 and A-119-16) were not
consolidated, there is a significant overlap in the relevant facts and the
arguments that are germane to both appeals.
[2]
The Federal Court allowed the appeals of Nevsun
Resources Ltd. (Nevsun) and Sunridge and set aside the provisional order of
garnishment and the final order of garnishment that had been issued against each
company. These garnishment orders related to the debt owing by the State of
Eritrea (Eritrea) to Delizia.
[3]
For the reasons that follow I would dismiss this
appeal. Separate reasons will be issued for the appeal related to Sunridge.
I.
Background
[4]
Delizia sold military aircraft equipment to
Eritrea in 2003 but did not receive full payment. Under the terms of the
contract, Delizia commenced an arbitration proceeding before the Arbitration
Institute of the Stockholm Chamber of Commerce. Eritrea did not fully participate
in the arbitration proceedings and an arbitral award of $2,175,775 (US) was
issued in favour of Delizia on April 18, 2006. Including arbitral fees and
interest, the amount increased to $4,062,428.70 as of July 17, 2013, the date
of the Order of Justice Mactavish registering the arbitral award and rendering
judgment for this amount (the Recognition Order). This was an ex parte
proceeding. Eritrea was not served with the notice of the proceeding nor the
Recognition Order.
[5]
Following the issuance of the Recognition Order
Delizia brought an ex parte application for a Garnishee Order to Show
Cause (a provisional order of garnishment) against Nevsun, a Canadian
corporation. This Order was granted on July 31, 2013 (Docket number T-1157-13)
and it provided that “any debts owing or accruing from
[Nevsun] to [Eritrea] be attached to answer the Judgment” and it also
ordered Nevsun to appear before the Federal Court to say why Nevsun should not
pay the amount owing by Eritrea to Delizia.
[6]
Nevsun, through its subsidiaries, operates a
gold, silver and base metal mine in Eritrea. Under the laws of Eritrea, the
Eritrean National Mining Corporation (ENAMCO) was entitled to acquire an
interest in the mine in Eritrea. As a result, ENAMCO acquired a 40% interest in
Bisha Mining Share Company (BMSC), the owner and operator of the mine. A wholly
owned, indirect subsidiary of Nevsun holds the other 60% interest in BMSC. As
the owner and operator of the mine, BMSC would be liable for any amounts payable
to Eritrea in relation to the mine.
[7]
A final order of garnishment dated January 9,
2015 (2015 FC 33) was issued by the Prothonotary against Nevsun to, inter
alia, “attach all debts owing and accruing from
Nevsun or its subsidiary BMSC to the State of Eritrea, including governmental
bodies”. By making Nevsun liable for amounts owing by its subsidiary,
the Prothonotary was piercing or lifting the corporate veil.
[8]
On appeal from this final order of garnishment
to the Federal Court, Nevsun raised a number of issues. However, since only two
of these issues were pursued in this appeal, the focus will be on these two
issues. In particular, Nevsun argued that the corporate veil should not be
pierced. If the corporate veil is not pierced, there is no debt owing from
Nevsun to Eritrea and therefore no debt to garnish. Nevsun also raised the
issue of whether failing to serve Eritrea in the manner as provided in the State
Immunity Act, R.S.C., 1985, c. S-18, resulted in the provisional order of
garnishment and the final order of garnishment being nullities.
[9]
The Federal Court judge determined that the
decision of the Prothonotary was to be reviewed de novo because the
order was vital to the final issue of the case. In conducting this review, the
Federal Court judge determined that there was no basis for piercing the
corporate veil and therefore he allowed the appeal from the decision of the
Prothonotary. Because he found that the corporate veil should not be pierced
the Federal Court judge noted that there was no need to consider the State
Immunity Act in this case. However, since the application of this Act
was fully argued before him, he addressed this issue and concluded that since
Eritrea was not served with the originating document leading to the Recognition
Order, the provisional order of garnishment and the final order of garnishment
were nullities.
II.
Issues
[10]
The issues in this case are:
a)
Did the Federal Court err by conducting a de
novo hearing?
b)
Did the Federal Court err in finding that the
corporate veil should not be pierced?
III.
Standard of Review
[11]
The standard of review for any finding of fact
is palpable and overriding error and for any question of law is correctness (Housen
v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235).
IV.
Analysis
A.
De Novo Hearing
[12]
The first question to be addressed is whether a de
novo hearing should have been held. The Federal Court decision was issued
on April 8, 2016. On August 31, 2016, this Court released its decision in Hospira
Healthcare Corporation v. Kennedy Institute of Rheumatology, 2016 FCA 215, [2017]
1 F.C.R. 331. In that decision, this Court concluded that the standards of
review as set out in Housen will apply to appeals from discretionary
decisions of Prothonotaries.
[13]
In conducting the de novo hearing, the Federal
Court judge was making his own determination with respect to questions of law.
This would be the same as applying the correctness standard of review for such
questions. As a result, with respect to questions of law, no error was
committed.
[14]
With respect to questions of fact, most of the
facts are not in dispute. The only finding of fact that Delizia challenges in
its memorandum of fact and law is the alleged finding by the Federal Court
judge that BMSC was validly incorporated as a separate company under the laws
of Eritrea.
[15]
The Prothonotary, in paragraph 11 of his
decision, noted that:
[11] Furthermore,
there appears to be little contradiction between the parties in holding that
the following organizational chart establishes, on paper only, according to
Delizia, the corporate structure of the group to which Nevsun and BMSC belong
and the percentage in terms of the interest of Nevsun, or of its subsidiaries
according to Nevsun’s approach, in the various entities:
[16]
The corporate structure that was illustrated in
the Prothonotary’s reasons is as follows:
(The corporate structure)
[17]
In paragraph 14 of his reasons, the Prothonotary
observed that:
[14] The Court would like to add that
even if the previous paragraph refers to “shares”, the evidence in the record
does not establish that BMSC is actually a corporation because Delizia was
denied concrete proof of that status during the cross-examination of Mr. Davis.
[18]
In my view this is not a clear finding of fact
by the Prothonotary that BMSC is not a corporation. It is simply a statement
related to the evidence and, in my view, is a refusal by the Prothonotary to
make any final determination on this point. In any event, the Prothonotary did
examine the law in relation to piercing the corporate veil for BMSC and he
described BMSC as a subsidiary of Nevsun in his Order. Therefore, he implicitly
concluded that BMSC was duly incorporated. Since no factual finding was
explicitly made by the Prothonotary that BMSC is not a corporation, it was open
to the Federal Court judge to make his own determination of this fact.
[19]
The record includes the affidavit of Clifford
Davis, the President and Chief Executive Officer of Nevsun and the affidavit of
Yehuda Tunik, a partner in the law firm of Tunik & Co. Law Offices in the
city of Tel-Aviv, Israel. Yehuda Tunik was a “duly
authorized representative” of Delizia and also “the
attorney of record for [Delizia] in respect of the foreign judgment whose
registration” was being sought in the Federal Court.
[20]
In paragraph 7 of his affidavit Clifford Davis
stated that:
BMSC is a
company incorporated under the laws of Eritrea in 2006.
[21]
In the affidavit of Yehuda Tunik, paragraph 38
is as follows:
As an example, Nevsun, a publicly traded
British-Columbia corporation, has its principal operations in the Bisha Mine in
Eritrea, held by the Eritrea registered corporation Bisha Mining Share
Company (hereinafter “BMSC”), in which Nevsun has a 60% interest, as
appears from page 6 of Nevsun’s Interim Financial Statement for the quarter
ended March 31, 2013, annexed hereto as Exhibit 14.
(emphasis added)
[22]
Since both the legal representative of Delizia
and the President of Nevsun, in sworn statements, acknowledged that BMSC was a
corporation, in my view the Federal Court judge did not commit any error in
finding that BMSC is a corporation. Even if the statement of the Prothonotary
referred to above could be construed as a finding of fact that BMSC was not a
corporation, in my view, this would have been a palpable and overriding error.
The only basis identified by the Prothonotary for this “finding”
was the lack of evidence. However, the sworn statements of the President of
Nevsun and the legal representative of Delizia would be evidence that BMSC was
validly incorporated. There was no reference to any evidence to contradict
these statements.
[23]
As a result, in this case, since this was the
only impugned finding of fact, the conduct of the hearing de novo, in my
view, did not adversely affect the result.
B.
Piercing the Corporate Veil
[24]
Delizia submits that the Prothonotary did not
err in piercing the corporate veil and finding that the debts of BMSC were the
debts of Nevsun. In order to assess whether it is appropriate to pierce the
corporate veil, it is first necessary to determine the applicable test to be
applied. This is a question of law, reviewable on the standard of correctness.
By conducting the hearing de novo the Federal Court judge was
essentially reviewing this question on the correctness standard.
[25]
In my view, the Federal Court judge did not
commit any error in his analysis of the law in relation to piercing the
corporate veil. I would only add a few comments to his detailed and thorough
analysis.
[26]
As noted by the Federal Court judge, the
Prothonotary stated in his reasons that:
28 In my view, it has been
established that Nevsun's controlling interest in BMSC enables it to, in
effect, have complete control over BMSC. In any event, nothing was adduced in
evidence to rebut this perception.
29 The same is true for the finding
that BMSC is being used by Nevsun as a conduit to avoid any liability here. Certainly,
the corporate structure reflected by the chart produced in paragraph [11], supra,
was not put in place to avoid this garnishment. However, it has not been ruled
out in the mind of the Court that by keeping such a structure in place, and
more specifically the presence of BMSC, Nevsun, like the State, sought to
protect itself in the event of such a proceeding.
[27]
I agree with the Federal Court judge that once
the Prothonotary concluded that the corporate structure was not put in place to
avoid the garnishment, this should have ended this part of the analysis. There
may well be tax implications of undoing a corporate structure. Nevsun should
not have an obligation to change its structure to benefit a third party.
[28]
In this case, the Prothonotary had to pierce
several corporate veils. BMSC, as the company operating the mine, would be the
person who is liable for any amounts owing to Eritrea in relation to the operation
of the mine. In order for the debts of BMSC to be the debts of Nevsun, each and
every one of the corporate veils of Nevsun (Barbados) Holdings Ltd., Nevsun
Africa (Barbados) Ltd. and Nevsun Resources (Eritrea) Ltd. would have to be
pierced. There is no direct discussion of the piercing of these corporate veils
but the separate existence of these corporations appears to have been disregarded
by the Prothonotary based on the comments of the Supreme Court of Canada in Kosmopoulos
v. Constitution Insurance Co., [1987] 1 S.C.R. 2, 34 D.L.R. (4th) 208 [Kosmopoulos].
[29]
In paragraph 23 and 24 of his reasons, the
Prothonotary stated that:
23 As
no garnishment situation involved a lifting of the corporate veil in light of
facts similar to the facts present here was cited to this Court, the Court is
inclined to rely on the broad statement by the Supreme Court in Kosmopoulos
v Constitution Insurance Co., [1987] 1 S.C.R. 2, where, on page 10, the Court
stated the following in the passage below. Certainly, the lifting of the
corporate veil comes into play as long as it is maintained that BMSC is a
corporation under Canadian law:
(a) "Lifting the Corporate
Veil"
As a general rule a corporation is
a legal entity distinct from its shareholders: Salomon v. Salomon & Co.,
[1897] A.C. 22 (H.L.) The law on when a court may disregard this principle
by "lifting the corporate veil" and regarding the company as a mere
"agent" or "puppet" of its controlling shareholder or
parent corporation follows no consistent principle. The best that can
be said is that the "separate entities" principle is not enforced
when it would yield a result "too flagrantly opposed to justice,
convenience or the interests of the Revenue": L.C.B. Gower, Modern
Company Law (4th ed. 1979), at p. 112. [...]
[Emphasis
added by the Prothonotary]
* * *
a) «Faire abstraction de la
personnalité morale»
En règle générale, une société est
une entité juridique distincte de ses actionnaires: Salomon v. Salomon &
Co., [1897] A.C. 22 (H.L.) Aucune règle uniforme n'a été appliquée à la
question de savoir dans quelles circonstances un tribunal peut déroger à ce
principe en «faisant abstraction de la personnalité morale» et en
considérant la société comme un simple «mandataire» ou «instrument» de son
actionnaire majoritaire ou de sa société mère. En mettant les choses au
mieux, tout ce qu'on peut dire est que le principe des «entités distinctes»
n'est pas appliqué lorsqu'il entraînerait un résultat [TRADUCTION] «trop
nettement en conflit avec la justice, la commodité ou les intérêts du fisc»:
L.C.B. Gower, Modern Company Law (4th ed. 1979), à la p. 112...
[Soulignés du protonotaire]
24 Here,
I believe that it is appropriate to accept that BMSC is only the mere agent or
puppet of Nevsun and that to conclude to the contrary would yield a result for
Delizia, which seeks to enforce the Judgment, that is too flagrantly opposed to
justice.
[30]
The only reasons cited by the Prothonotary for
finding that it would be “too flagrantly opposed to
justice” to respect the separate existence of the corporations are that:
a)
BMSC is the mere agent or puppet of Nevsun; and
b)
there is a judgment for an outstanding unpaid
debt owing by Eritrea (a creditor of BMSC) to Delizia (a third party).
[31]
The unpaid debt, in this case, is not a debt of
any of the corporations whose veil was being lifted. If the corporate veil
could be pierced for debts of creditors of a corporation then it could also be
pierced for debts of that corporation. Lifting the corporate veil could then be
done in any situation where a person owns all of the shares of a particular
corporation (and hence the corporation could be viewed as the puppet of that
person) and the corporation has an unpaid liability. Any individual who owns
all of the shares of a company would then be personally liable for the debts of
that corporation. In my view, this cannot be the correct result and I agree
with the Federal Court judge that control alone cannot justify lifting the
corporate veil to hold a shareholder liable for the debts of that corporation.
[32]
I would also note that the Supreme Court of
Canada in Kosmopoulos,
at page 10, stated that:
The law on when a court may disregard this
principle by "lifting the corporate veil" and regarding the
company as a mere "agent" or "puppet" of its controlling
shareholder or parent corporation follows no consistent principle.
(emphasis added)
[33]
The reference to the company being a mere agent
or puppet is not a condition that would justify lifting a corporate veil but
rather it is a consequence of lifting the corporate veil.
[34]
As a result, I agree with the Federal Court
judge that there is no basis to pierce the corporate veil in this case. As
noted by the Federal Court judge, this finding that the corporate veil should
not have been lifted is sufficient to dispose of this matter. Since any
comments on the application of the State Immunity Act would, therefore,
be obiter, I would refrain from commenting on this issue.
[35]
As a result, I would dismiss the appeal with
costs.
“Wyman W. Webb”
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“I agree
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D. G. Near J.A.”
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“I agree
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J. Woods
J.A.”
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